Buried treasure

Meeting North America's natural gas demands with domestic resources

Natural gas is one of the earth’s most valuable natural resources and a major source of the world’s energy supply. It is believed that gas was first discovered by the Chinese, who noticed gas escaping from just beneath the earth’s surface. Realizing the burning properties of this gas, the Chinese piped it though bamboo reeds over short distances and used it as a fuel source, and much later as an “eternal flame.”

Today, natural gas is among the cleanest of all fossil fuels. It is hard to visualize, as it is colorless, odorless and shapeless in its natural form. What makes it so valuable is that it is highly combustible and environmentally pretty friendly. In other words, when it is burned, it releases a lot of energy, but relatively few potentially harmful byproducts into the air.

Invisible superpower

The word “gas” conjures many connotations. Upon hearing or reading it, our minds might jump to the gas we pump into our vehicles to make them run – gasoline. Or, we might think of the gas used by heavy duty trucks and large machinery – diesel. While these commonly are referred to as “gas,” they are petroleum-based liquids with far greater and more complex carbon molecule chains. But when we’re talking about natural gas, we are referring to a different natural resource found below the earth’s surface that we use every day – to generate electricity, light our cities, heat our homes, power our factories and run our appliances. In liquid form, it is an essential raw material (also known as propane) used to fire up backyard barbeque grills, as an agent in fertilizers that produce an abundant harvest, as well as an ingredient in paints and plastics, numerous chemicals and even in medicines.

Measuring the invisible

Although we can’t see, smell, taste or touch raw natural gas, we can measure it, and in several different ways. The energy content of natural gas (as well as other forms of energy) can be measured in British thermal units (Btus). A Btu is the amount of energy needed to heat one pound of water by one degree Fahrenheit. Natural gas is also measured in cubic feet. One cubic foot equals roughly 1,000 Btus. Two hundred cubic feet would be adequate to meet the daily natural gas needs of an average U.S. home (fueling the furnace, stove, hot water heater, etc.). It adds up. According to the U.S. Energy Information Administration, in 2016 the U.S. consumed approximately 27 trillion cubic feet (Tcf) of natural gas.1 Another term used in measuring natural gas is billion cubic feet (Bcf); one Bcf equals around one trillion Btus. Here’s a look at the various terms and what they represent.

Natural gas conversion

Unit

Cubic Feet

Btus

1 cf

1 cf

1,024 Btus

1 mcf

1,000 cf

1,024,000,000 Btus (1 MMBtus)

1 Bcf

1 billion (1,000,000,000) cf

1.024 trillion Btus

1 Tcf

1 trillion (1,000,000,000,000) cf

1.024 quadrillion Btus

Note: Based on U.S. average heat content as per the Energy Information Administration

Producing natural gas

Natural gas can be produced both conventionally and unconventionally. Conventional exploration for oil and gas has been the focus of most exploration and production companies over the course of the last century. Conventionally produced gas has been drilled and gathered from depths of less than 1,000 feet to more than 35,000 feet. In recent years, advanced drilling exploration and extraction technologies have enabled greater access to deep reservoirs, although due to increased temperatures and pressures (to say nothing of the time involved) drilling at great depths is still a costly operation. However, most of the growth in supply today comes from shale, or a combination of other lower-quality reservoir rocks.

Shale is a fine-grained, sedimentary rock that is composed of clay and tiny particles of other minerals, such as quartz and calcite, and organic materials derived from plants and animals that died while the precursor sediments were being deposited. “Shale gas” is locked in small pores inside the shale, which must be hydraulically fractured to release the gas (or oil, as the case may be). Gas is also being produced from “tight gas sandstone” – low-quality, mostly non-porous and impermeable rock. Gas is also associated with coal beds, and “coal bed methane” has been targeted at several locations around the world, most notably in the U.S., China and Australia.

Uncover more about natural gas:

From worthless to priceless

From worthless to priceless

Originally, natural gas was gathered as a byproduct of traditional oil production, which involved drilling vertically into geological formations where oil and gas have been found for decades. The gas was depressurized and released as oil was brought to the surface.

However, transporting natural gas requires access to pipelines. In the absence of nearby pipelines, natural gas is considered essentially without value and is simply burned off (or “flared”) from a pit near the well. It is safer and environmentally more prudent to flare gas than to let it escape into the atmosphere. Flaring still occurs in parts of the U.S., and more so in developing countries where markets and infrastructure are lacking. In fact, the World Bank estimates that 5.2 trillion to 6 trillion cubic feet of gas is flared or vented worldwide each year.

That is changing in the U.S., however, due to extensive pipeline infrastructure build-out currently taking place. Increasingly, quantities of natural gas lacking a nearby market are quickly and efficiently being transported from producing regions to areas of consumption through a complex, primarily underground network of 2.4 million miles of gathering, intrastate and interstate pipelines across the continent.2

A dynamic duo

A dynamic duo

Accessing gas that is trapped inside rock has always presented challenges. Hydraulic fracturing (pioneered in the 1940s) involves using highly pressurized water, sand and other liquids to fracture the rock and free the gas. However, until a few years ago, the majority of shale gas (and oil) remained commercially unviable.

But advancing technologies have created new ways for extracting unconventional gas that have radically changed the U.S. energy picture. The combination of two extraction techniques – the hydraulic fracturing mentioned above and a technique called horizontal drilling (which came into use in the 1980s) – has revolutionized the production of large, unconventional shale formations in a number of states.

Once considered of little value to gas drillers because their natural gas was nearly non-extractable, these same shale reservoirs can now economically yield abundant amounts of gas for decades to come. In 2005, gas produced unconventionally represented over 30% of U.S. natural gas production. In the past few years, shale gas production has comprised more than half of total U.S. natural gas production.

Understanding the potential

Understanding the potential

Reserves may be proved or potentially recoverable. Proved reserves refers to quantities of hydrocarbons estimated with reasonable certainty to be commercially recoverable from known accumulation under current economic conditions, operating methods and government regulations. Potentially recoverable resources describes volumes of natural gas that are potentially recoverable under existing and foreseen technological conditions. Today, the U.S. has one of the world’s largest known potentially recoverable natural gas resources.

Deconstructing natural gas

Deconstructing natural gas

Natural gas is composed primarily of methane (“dry” or “lean” gas) but also can include heavier compounds such as ethane and propane, among others, all of which have slightly different combinations of carbon and hydrogen in their molecular makeup. Natural gas can exist in a liquid state at underground pressures and then become gaseous at normal atmospheric pressure. Natural gas liquids (NGLs) are components of natural gas that are separated from the gas state in the form of liquids. Natural gas liquids are classified based on their vapor pressure, while natural gas has an intermediate vapor pressure. Natural gas liquids with a low vapor pressure are called condensates, and those with a high vapor pressure are called liquefied petroleum gas (also known as LPG or propane).

Natural gas is made up of naturally occurring hydrocarbons (a compound of hydrogen and carbon). The product of decomposed matter, hydrocarbons come in different molecular lengths and constructs, including straight chains, chains with branches, and complete rings. When broken down over time, hydrocarbons form crude oil or natural gas. Depending on the pressure and temperature in which they exist, hydrocarbons may be gaseous, liquid, semisolid or solid, according to how many carbon atoms they contain and whether they are under pressure or at atmospheric conditions. Propane and butane, for example, are liquids under pressure but are gases at atmospheric conditions.

Methane: 1 carbon atom and four hydrogen atoms

Fossil fuels, deconstructed

As the table above illustrates, the hydrocarbons comprising natural gas have many uses. Methane (composed of one carbon atom and four hydrogen atoms) is the purist form of natural gas.

Processing gas

Processing gas

Although much of the gas produced is “dry” (almost entirely methane), wet natural gas requires processing at natural gas processing plants. That is where the liquids (water, liquefiable hydrocarbons and other impurities) are separated from the dry gas. Dry gas moves on through pipelines and is used to heat our homes and support electric power generation. Wet gas is further refined either at the same location or is piped to another location where it is “fractionated” primarily into ethane, propane, butane and natural gasoline. These natural gas liquids are then transported by interstate pipelines to petrochemical facilities, refineries or industrial plants depending on their use.

Ethane, propane and butane are feedstock (raw materials) used by the chemical industry to make various products, such as ethylene, which is used to help food ripen, in the manufacturing of certain types of plastics and as an inhalation anesthetic. Propane is used in home heating and cooking, while butane is used in lighters and added to gasoline to help reduce pollution. Natural gasoline is used as a solvent and thinner, and can be combined with other, higher-octane substances to create gasoline. It is also used to determine octane ratings in commercially made gasoline.

Natural gas value chain: From wellhead to end user

Source: Tortoise Capital Advisors

Gas on the go

Gas on the go

Natural gas is transported to some industrial, commercial and electric generation customers from storage facilities via major interstate and intrastate pipelines, while others, including residential customers, get natural gas from a local regulated gas utility (also called a local distribution company) via local distribution pipelines. Some utilities are owned by investors while others are owned by local governments. The distribution companies obtain natural gas at transfer points on the major pipelines called “city gates.” There, the gas is depressurized and a sulfur-smelling odorant called mercaptan is added to make it easier to detect gas leaks. From the city gate, the gas flows through a vast network of smaller-diameter pipelines to homes and businesses.

Liquefied, compressed natural gas: acronyms galore

Liquefied natural gas (LNG) is made up of mostly methane that is cooled to approximately minus 260 degrees Fahrenheit and compressed to 1/600th of its size in its liquid state so that it can be transported to areas where it’s needed. Most often, LNG is transported by tanker ships to countries that consume more than they can produce or lack international pipeline access to import gas. Once this cool, compressed gas arrives at its destination, it is heated to return it to its original gaseous state. At that point, it can be transported by pipelines to homes and businesses. As global demand for gas increases and it gains in popularity, it is anticipated that global demand for LNG trade also will expand.

LNG Tanker

Compressed natural gas (CNG) is made by compressing natural gas until it is less than one percent of its volume at standard atmospheric pressure.

CNG and LNG are quickly growing in popularity as a fuel for powering fleets of vehicles, such as taxi cabs, buses, local delivery trucks, refuse and recycling trucks and other trucking fleets. The trucking industry, where millions of 18-wheelers transport all manner of goods across the U.S., is at the early stages of switching from petroleum to natural gas to power its vehicles, much to the benefit of both companies that make engines that run on natural gas, and for transporters, such as United Parcel Service and Federal Express, which stand to reap the rewards of markedly cheaper fuel.

CNG – powered bus

The switch from diesel to natural gas-fueled trucking is an emerging trend not only in the U.S., where attractive low natural gas prices are speeding the conversion, but in other countries as well.

Infrastructure constraints remain a key impediment; there currently are not enough fueling stations in place to make CNG-burning vehicles a convenient choice for most drivers, despite the fuel's lower cost and environmental benefits relative to gasoline.

Managing supply and demand

Managing supply and demand

The North American energy boom has resulted in abundant natural gas supply, which is working to reduce U.S. dependency on foreign imports. Demand for gas fluctuates, largely based on season and weather. Demand historically has been higher in the cold months, when natural gas is needed to heat homes and businesses. However, because natural gas is increasingly being used for electric generation, demand during the warmer months to cool homes and businesses is on the rise, especially in southern states. This underscores the importance of natural gas storage in the overarching U.S. energy picture.

Prior to 1992, natural gas was a regulated commodity, and storage was handled by pipeline companies that in turn sold it as part of a bundled product to utilities. But that year, the Federal Energy Regulatory Commission (FERC) introduced Order 636, which deregulated the natural gas market and made storage available to industry participants for commercial purposes, including adjusting prices based on demand. FERC also has the authority to conduct and review interstate natural gas pipelines, coordinate environmental and land permitting and determine if a proposed pipeline meets “public convenience and necessity.”

Natural gas is usually stored underground in large, mostly depleted reservoirs – the method that made the most sense before the country’s pipeline network was large enough to transport large amounts of natural gas quickly over long distances. These storage reservoirs are either depleted natural gas reservoirs (the most common option) or drained aquifers or emptied salt mines (domes), which are reconditioned before the natural gas is introduced. The gas becomes pressurized as it is injected into the storage reservoir, which helps when it’s time to retrieve gas from storage for use. A certain amount of gas has to stay in the storage reservoir to provide the pressurization needed to extract it. That gas is called “cushion” or “base” gas, while “working” gas refers to the amount of natural gas in the storage reservoir available for removal and replacement. A storage reservoir’s capacity is referred to as its “working gas capacity.”

Natural gas is used every day to generate electricity, light our cities, heat our homes, power our factories and run our appliances. In liquid form, it is an essential raw material (also known as propane) used to fire up backyard barbeque grills, as an agent in fertilizers that produce an abundant harvest, as well as an ingredient in paints and plastics, numerous chemicals and even in medicines.

Natural gas around the globe

Source: Bloomberg as of 3/31/2017 (Price per USD/MMBtu)

North America's abundant natural gas is attractive to foreign customers in countries where it is far more expensive, as is the cost of electricity. While prices fluctuate, the map above provides an example of cost differentials of natural gas in the U.S., the U.K. and Japan.

The future of natural gas

A confluence of factors is pushing America to embrace natural gas as a more widespread energy source. It is abundant; the Energy Information Administration estimates there is enough natural gas in U.S. reserves to meet our needs for more than 100 years. There are environmental benefits, as well; replacing gasoline or coal with gas as a source of energy results in lower carbon emissions and less air pollution. Given North America’s vast and accessible reserves, natural gas is an energy solution seemingly destined to play an increasingly vital role in our nation’s energy future.

Energy Information Administration, April 2017

NaturalGas.org

Given North America’s vast and accessible reserves, natural gas is an energy solution seemingly destined to play an increasingly vital role in our nation’s energy future.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. This material should not be relied upon as investment, tax or legal advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation.